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Entries in Cafeteria Plans
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IRSNotice 2014-01, issued yesterday, provides helpful guidance for the administration of cafeteria plans after the U.S. Supreme Court’s decision in the Windsor case. The guidance provides answers to a number of questions that employers and plan administrators have been asking, including the following:

May a participant who was married to a same-sex spouse as of the date of the Windsor decision (June 26, 2013) be treated as if he or she experienced a change in legal marital status? Yes. The decision to recognize same sex marriages for federal law purposes for the first time amounts to change in legal marital status. Accordingly, a cafeteria plan may permit such a participant to revoke an existing election and make a new election in a manner consistent with the change in legal marital status.

Would a change in the tax treatment of a benefit offered under a cafeteria plan be considered a significant change in the cost of coverage? No. The fact that same sex married couples can be covered without the imputation of income (and pre-tax dollars can be used to purchase benefits) does not constitute a significant cost change for purposes of permitting a status change. For periods between June 26 and December 31, 2013, however, a cafeteria plan will not be treated as having failed to meet the cafeteria plan requirements if the plan permitted a participant with a same-sex spouse to make a mid-year election change based on a significant change in the cost of coverage.

At what point must an employer begin to allow pre-tax salary reductions for same sex married couples? If an employer receives notice before the end of the cafeteria plan year including December 16, 2013 (the publication date of the IRS Notice) that a participant is legally married, then the employer must begin treating the amount that the employee pays for the spousal coverage as a pre-tax salary reduction under the plan no later than the later of (a) the date that a change in legal marital status would be required to be reflected for income tax withholding purposes under Code Section 3402, or (b) a reasonable period of time after December 16, 2013.

At what point may a cafeteria plan permit a participant's flexible spending account to reimburse covered expenses for a same sex spouse? A cafeteria plan may permit FSA reimbursements for the covered expenses of a same-sex spouse, or of a same-sex spouse's dependent, that were incurred during a period beginning on a date that is no earlier than (a) the beginning of the cafeteria plan year that includes the date of the Windsor decision or (b) the date of marriage, if later. This would include a health, dependent care, or adoption assistance FSA to reimburse covered expenses of the participant's same-sex spouse.

Much more post-Windsor guidance is expected early next year to deal with a variety of issues under retirement plans as well as, in general, the possible retroactive effect of the invalidation of Section 3 of the Defense of Marriage Act.

Late last week the IRS released Notice 2013-71, modifying the health flexible spending account (“health FSA”) use-it-or-lose-it rule to allow participants to carry over up to $500 in unused health FSA funds. Although not unexpected (the Service has hinted at such a change a number of times over the past year), this new feature is welcome relief to participants and plan sponsors. Plan sponsors may adopt this optional amendment effective as early as the 2013 plan year.

Notice 2013-71 provides that a plan sponsor may, at its option, allow a participant to carry over up to $500 of unused health FSA funds to the immediately following plan year. Unused health FSA funds are those remaining at the end of the plan’s run-out period (if any), and do not count against the limit on participant salary reduction contributions. Accordingly, a participant could elect to contribute the full $2,500 (as indexed in future years) permitted by law and also carryover as much as $500.

The Patient Protection and Affordable Care Act modified the rules relating to cafeteria plans to impose a new $2,500 annual limit on the amount that an employee may elect to contribute to a health flexible spending account (“health FSA”), effective January 1, 2013. The modification came in the form of new Section 125(i) of the Internal Revenue Code, and the IRS recently issued Notice 2012-40 to explain the new rules. Many of our clients have asked us to explain how the new $2,500 limit will work.

1. Can employees change their HSA contribution amounts at any time during a plan year or are they restricted to making a change only if a qualifying event occurs as defined by the IRS? Generally employees may make prospective changes to their HSA contribution amounts at any time and for any reason, though employers may restrict election changes to once a month and upon loss of HSA eligibility. HDHP coverage, however, is subject to the familiar election change rules.

2. Can HSA funds be used to pay for medical expenses incurred prior to the establishment of the HSA, but while an individual was covered under the HDHP? Qualified medical expenses generally must be incurred after the HSA is established in order to be reimbursable on a tax-free basis. State trust law determines when an HSA is established, and most state trust laws require that a trust actually be funded (i.e., a deposit made) in order to be established. Note, it is the employee’s responsibility to determine whether the reimbursement is subject to tax.

High-deductible health plans (HDHPs) with a Health Savings Account (HSA) feature are growing in popularity. While implementing an HDHP/HSA arrangement can be complicated, having a sense of the landscape can prevent uncomfortable bumps and bruises. This post explores some of the general eligibility questions we are asked most frequently. It is the first in a series on HDHP/HSA arrangements, and we hope that together these posts will provide a useful overview on implementing an HDHP/HSA arrangement.

1. Can an employer offer a health flexible spending account (FSA) to employees not enrolled in the HDHP and a dependent care assistance plan (DCAP) to all employees, and are there any problems with this?There are no problems with offering a DCAP to all employees. There are no problems with offering a health FSA or health reimbursement account (HRA) to those employees not participating in the HDHP/HSA. There may, however, be minor issues in the first year of HSA coverage for those employees who previously were covered by a health FSA or HRA, and there are also issues for employees whose spouses are covered under a health FSA or HRA.